Here’s the Complicated Back Story of Microsoft and HPE’s Latest Collaboration

Microsoft is betting that new data center hardware from long-time partners Hewlett-Packard Enterprise, Dell, and Lenovo will boost its Azure cloud against rival Amazon.

These machines, which Microsoft execs said are now available after a long buildup, will let businesses run Microsoft Azure software in their own server rooms and connect it as needed to Microsoft data centers for additional computing or storage capacity. Pairing on-premises computing with cloud data centers is an example of what techies call “hybrid cloud,” and is seen by most tech vendors—other than Amazon—as a key advantage over Amazon, which is mostly about moving customer data and applications into AWS facilities.

That Microsoft (MSFT) relies on hardware makers, also known as original equipment manufacturers or OEMs, to propagate its software is nothing new. Microsoft built its lucrative Windows and Office franchises by teaming with HPE’s predecessor company HP Co. Dell Technologies’ forebear Dell Inc., and IBM (IBM). Those companies sold desktop and laptop PCs pre-installed with Windows, and often Office, to consumers and businesses alike. Microsoft partnered with the same companies to push Windows Server software into corporate data centers.

For the record, IBM sold its PC business to Lenovo in 2004 and its Intel (INTC)-based server business to the same company ten years later.

But Microsoft’s rapport with these hardware allies has long been tense and became more fraught over the past decade as the software giant itself moved into the hardware business, designing Surface tablets and laptops and offloading their production mostly to low-cost contract manufacturers.

Thus, Microsoft Surface devices competed directly with laptops from—you guessed it—Dell, HP (HPQ), and Lenovo. At roughly the same time, Microsoft, along with Facebook (FB), Google (GOOG), Amazon (AMZN), and other Web-based companies which were gearing up their own massive data centers, started designing their own servers, and switching to hardware built by contract manufacturers.

That put a dent in the sales of name-brand server and networking hardware from companies like HPE, Lenovo, and Dell along with Cisco (CSCO).

Over the summer, HPE chief Meg Whitman repeatedly warned that the company needs to assess whether it can keep supplying low-end servers to cloud vendors. In one quarter, she blamed the fall-off in sales of such servers on one major buyer, which was later “outed” as being Microsoft.

HPE, Dell, and Lenovo need to sell their gear—and related services—to corporate IT departments; Azure Stack gives them a way to do so while also combating the existential threat most of these companies see in AWS.

Analyst Patrick Moorhead, president of research firm Moor Insights & Strategy, summed it up: “While hardware makers would like to run inside Azure Public Cloud, the next best thing is to be on customer premises. Azure Stack gives them a way to do that.”

Gartner (IT) vice president Ed Anderson agreed: Azure Stack gives hardware partners a play in a market from which they would otherwise be excluded, he said via email.

“Microsoft is effectively throwing them a bone. I think the challenge for the OEMs is to demonstrate real value in this relationship, which means driving Azure adoption and increased utilization. If the hardware OEMs get in the way of this primary goal, or slow down the process in any way, Microsoft is likely to build its own system and once again bypass their partners.”

Note: (September 26, 2017 11:23 a.m. EDT) This story was updated to add quotes from Gartner and pricing for the Dell Azure Stack offering.